Is this the key to bringing down the cost of advice?

What does it mean to have good financial advice? How many hours go into preparing it? How many of these hours go into compliance versus crunching the numbers when it comes to advising on simple issues like the basic elements of cashflow?

Scaled advice is generally lower-risk advice provided on a single issue or small set of issues. However, providing scaled advice is currently weighed down by the same regulations overlaying the provision of comprehensive and detailed wealth strategies which potentially carry higher risk. This results in advice being less affordable and accessible for consumers.

The Best Interest Duty, and many other obligations on the provision of financial advice are vitally important protections put in place to protect consumers.

The primary vehicle by which advisers meet these obligations is through the Statement of Advice (SOA). The SOA is a comprehensive analysis of individual needs, goals and essential facts material to your financial situation that will have bearing on the development of a comprehensive wealth strategy. It has reportedly been 80 pages long in some instances, and is an undertaking of what you will receive.

There is however another option – the Record of Advice (ROA).

The ROA is a much shorter document that might be used if engaging with an adviser. Sadly it can only be used in select circumstances and usually when a lengthy and costly SOA has already been issued. 

The 2013 world which gave us scaled advice, the SOA and the ROA – did not contemplate a COVID-19 constrained economy where their viability and the many rules governing economic activity is being challenged. A surge in demand as a result of the downturn for quality advice on specific issues that is clear, concise and quick was not contemplated either. Indeed many such vulnerable demographics were already struggling to access financial advice prior to the pandemic taking hold.

As one of our initiatives for economic recovery, the FSC proposed a two year trial in which ROAs could be used for scaled advice provision and that its effectiveness be monitored.

When talking to businesses in the advice industry, they will tell you the biggest driver of the cost to serve clients is time. This is time spent on ensuring every aspect of the advice is combed over for compliance with a shapeshifting and ever-enlarging set of rules they must operate by.

Some estimates indicate that producing an SOA is estimated to take between six and eight hours. The FSC wants to enable businesses the flexibility to road test the ROA and its impact on cost and the hours spent in preparing scaled advice.  

The ROA will not be a panacea to the issues associated the web of documentation both providers and consumers are currently entangled in. However such a trial could allow the provision of comparatively low risk advice more easily when consumers need it most.

Crucially, the ROA still requires the adviser to set out the basis of the advice; its costs and risks; provide warnings and essential disclosure information; while crucially securing your consent as a consumer.

Copious documentation will not offer consumers the same experience nor necessarily true value in the new economy businesses and individuals must now make sense of. It is an irony of the system that requirements for so much documentation potentially confuses or deters clients more through complex jargon and presentation.

The limited information available on the use of ROAs and their benefits suggests all the more reason to see where it works and where it does not. To do this means taking reasonable time to assess its effectiveness and asking the right questions.

The elaborate fortress of advice regulation and its influence on cost of advice is impressive as it is far reaching. Like no other industry, an adviser’s time goes into substantial compliance with a disproportionate impact on cost. At the minimum we should be looking at why that is as we trial alternatives.

Zach Castles is Policy Manager (Advice) at the Financial Services Council.